CHAPTER 2 CHAPTER 3

DEMAND – is defined as the quantity that buyers are willing PRICE ELASTICITY OF DEMAND – or the degree of
to buy responsiveness of quantity demanded to a change in price
is measured by dividing the percentage change in the price
- Inversely proportional
● ELASTIC: strongly responsive [Q changes
THE LAW OF DEMAND – as price increases the quantity proportionately than P]
demanded of the product decreases, but as price ε > 1
decreases, the quantity purchase will instead increase
● UNIT ELASTIC/UNITARY: equally responsive [Q
CETERIS PARIBUS ASSUMPTION – factors other than changes proportionately than P]
price which also influence the quantity (tastes and ε = 1
preferences, income, expectation on future prices, prices of
related goods like substitutes and compliments and the size ● INELASTIC: weakly responsive [Q changes
of the population) proportionately than P]
ε < 1
CHANGES IN DEMAND AND SHIFTS IN THE DEMAND
CURVE
PRICE ELASTICITY OF DEMAND FORMULA
● If the ceteris paribus assumption is dropped, then
changes in the non-price factor shall takes place. 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄 %∆𝑄
This will result in the position or slope of the 𝑝𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 = 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃
/ε = %∆𝑃
demand curve and a change in the entire demand
schedule. CALCULATING THE PERCENTAGE CHANGES
USING THE MIDPOINT METHOD
Increase in income Shift to the right 𝑄 𝑒𝑛𝑑 𝑣𝑎𝑙𝑢𝑒−𝑠𝑡𝑎𝑟𝑡 𝑣𝑎𝑙𝑢𝑒
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃 = ×100%
Decrease in income Shift to the left 𝑚𝑖𝑑𝑝𝑜𝑖𝑛𝑡

Greater taste/preference Shift to the right

● The midpoint is the number halfway between the
Less taste/preference Shift to the left start and end value, average of those value
Increase in population Shift to the right
Decrease in population Shift to the left ARC ELASTICITY OF DEMAND
Greater speculation Shift to the right ● The coefficient of the price elasticity of demand
Less speculation Shift to the left between two points along the demand curve
FORMULA:
SUPPLY – the concept shows the supply of the seller’s side [(𝑄𝑑2−𝑄𝑑1)]
𝑎𝑟𝑐 𝑒𝑑 =
of the market [(𝑃2−𝑃1)]

- Directly proportional POINT ELASTICITY

● Measures elasticity at a finite point of the demand
SUPPLY SCHEDULE AND SUPPLY CURVE – the supply curve
of a product is defined as the quantity that sellers are willing FORMULA:
to sell (𝑄2−𝑄1)/𝑄1
𝑝𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = (𝑃2−𝑃1)𝑃1
CHANGES IN QUANTITY SUPPLIED AND MOVEMENT
ALONG THE SUPPLY CURVE – this is reflected as a
movement along the supply curve and reflected to as TABLE 1
MARKET DEMAND FOR PORK FOR A PERIOD OF 1
change in the quantity supplied
DAY
THE LAW OF SUPPLY – there are also non-price POINT PRICE QUANTITY
determinant that influence supply DEMANDED in kl
● Cost of production A P 30 120
● Availability of economic resources
● Number of firms in the market B 35 100
● Technology applied
● Producer’s goal C 40 80

CHANGES IN SUPPLY AND SHIFTS OF THE DEMAND D 45 50

CURVE
%∆𝑄
Increase in the number of Shift to the right
100−120
sellers = 110
×100
Decrease in the number of Shift to the left = 18. 18
sellers
%∆𝑃
Better technology Shift to the right
Decrease in the cost of Shift to the left =
35−40
×100
37.5
production
Goals of the firm It depends = 13. 33
MARKET EQUILIBRIUM – demand and supply should
eventually be analyzed as one. Since the market operates
within the faces of both demand and supply. Combining the PRICE ELASTICITY OF DEMAND
%∆𝑄
demand and supply will show the point of market equilibrium = %∆𝑃

● This equilibrium is attained at the point where =

18.18
demand is equal to supply 13.33

VIOLATIONS OF THE LAW OF DEMAND AND SUPPLY = 1. 36

● A common way of attempting to go against the law = 𝐸𝐿𝐴𝑆𝑇𝐼𝐶

is the use of price controls. Where price ceilings
COMMODITIES AND THEIR ELASTICITY
are set by the government normally on basic goods
● Elasticities which are less than 1: infant’s milk,
ALFRED MARSHALL – combines law of demand and law electricity, medicine, salt, rice, sugar and water
of supply
 ● Elasticities greater than 1: signature bag’s, PROJECTING THE FUTURE – important decisions about
chocolates, family computers, imported shoes, what and how many goods to produce depends very much
perfumes, compact disc. on the entrepreneur’s estimate of future demand

SUBSTITUTION AND PRICE ELASTICITY OF DIFFERENT METHODS OF MAKING A FORECAST

DEMAND
1. THE AVERAGE ARITHMETICAL GROWTH RATE
● The degree of substitution between a product and METHOD – the computation of this method is
a related products determines its price elasticity of carried out by getting the percentage change
demand. The extent of substitution depends on the between two values which is simply the ratio of the
substitution effect change between this year expressed in percentage
Some factors are the following: form
▪ Competing products
▪ Desirability of a product relative
to its substitutes due to quality YEAR SALES % GROWTH
RATE
DEMAND ELASTICITY AND PRICING
1990 P 23.2 M -----
- A change in price and quantity demanded (Q1) can
increase revenue and earnings depending on the 1991 24.1 3.9
price elasticity of demand
1992 40.3 67.22
THE TAX BURDEN – when a good is sold, a sale has to
paid to the government on the sale of that commodity. 1993 30.2 (25.06)

INCOME ELASTICITY OF DEMAND – the coefficient of 1994 35.8 18.54

income elasticity of demand measure’s a product
1995 15.6 (56.42)
percentage change in demand as ratio of the percentage
change in income which caused the shift in the demand 1996 24.9 59.62
curve
1997 25.8 3.61
As income increases, the coefficient of;
1998 52.7 104.26
● > 1 means demand is elastic and the good is
superior Total: 175.67%
● < 1 means demand is inelastic and the good is
inferior 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 =
175.67%
8
● = 1 means demand is unitary and the good is
normal =21.96%
PROJECTED VALUES
ERNEST ENGEL 1999: P 52.7 × 21.96% = 11.57 + 52.70 = P 64.27 M

● Study of income elasticity of food came from him 2. TREND LINE USING THE LEAST SQUARE
● The findings of his study are depicted in what is METHOD – the computation of this method is
accepted now as ENGEL’S LAW carried out by getting the percentage between the
● According to him, when income increases, the values which is simply the ratio of the change
percentage that is spent for food tends to decrease between the years expressed in percentage form
INCOME DEGREE OF TYPE OF GOOD
ELASTICITY INCOME
CHAPTER 4
ELASTICITY
σ Elastic Normal luxury
1.5 Elastic Normal luxury
.75 Inelastic Normal – necessity
.50 Inelastic Normal - necessity
.30 Inelastic Inferior
.22 Inelastic Inferior

FORMULA FOR INCOME ELASTICITY OF DEMAND

∆𝐷
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑 ( 𝐷
)
∆𝐼
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒 ( 𝐼
)

INCOME ELASTICITY OF DEMAND

{(D1-D0)/(D1+D0)}÷{(I1-I0)/(I1+10)}

CROSS ELASTICITY OF DEMAND – economic concept

that measures the responsiveness in the quantity demanded
of the goods when the price for another goods changes

- It helps to determine the effect of the price of these

products

FORMULA:
𝑄𝑥/𝑄𝑥 𝑄𝑥 𝑃𝑦
𝑒𝑐 = 𝑃𝑦/𝑃𝑦
= 𝑄𝑥
× 𝑃𝑦

PRICE ELASTICITY OF SUPPLY – if demand varies in

response is a change in its determinants, so does supply.
The coefficient of price elasticity of supply measures the
percentage change in the quantity supplied of a commodity
compared to a percentage change in the price of such
commodity
% change in quality supplied / % change in price
 INCOME EFFECT - the potential increase in the
consumption of both commodities

SUBSTITUTION EFFECT – if the consumer is not

content to realized the income effect as the new
condition allows a further retirement by substituting
more of Pepsi for Coke.

UTILITY AND DEMAND

DERIVATION OF THE DEMAND CURVE: a potential

consumption for a certain commodity item given its
market price and the income of its potential consumers.

CONSUMER’S SURPLUS: the peso value that the

consumer is willing to pay for a certain volume of
commodity item is less than the peso value of the
benefit from its consumption

THE PARADOX OF VALUE: is the answer to the

question that troubles Adam Smith in the 18 th century,
whose book “The wealth of Nations” marked the
beginning of Modern Economics

CONSUMPTION
● THE INDIFFERENCE CURVE: illustrates this
property assuming two commodity items,
which are food and clothing
● THE LAW OF DIMINISHING MARGINAL
UTILITY AND THE SHAPE OF THE CURVE:
between any point to another along the
indifference curve, the ratio between utility
gained and utility foregone is always equal to
1 and, therefore constant.
∆ 𝑓𝑜𝑜𝑑 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛
𝑀𝑅𝑆 = ∆ 𝑐𝑙𝑜𝑡ℎ𝑖𝑛𝑔 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛

● HIERARCHY OF INDIFFERENCE CURVE:

changing the consumption levels with commodity
items at every point of combination along the
curves leads to another indifference curves and
utility level
● THE BUDGET LINE AND THE OPTIMUM
COMBINATION: the relationship between the
indifference curve and the budget line is the
optimum or best combination in the consumption of
commodity items within a budgetary limit

THE BUDGET LINE – contains infinite points of

combination in the consumption of two commodity items
that the same budget can buy at constant prices

THE OPTIMUM COMBINATION – the quantities of the

commodity items at any point along a budget line
indicates purchasing capacity. This point, together with
the said purchase quantities coincides with that of
indifference curve and hence, meet the latter’s budget
requirement

OTHER CONCEPTS OF CONSUMPTION

EQUI-MARGINAL PRINCIPLE – shows that a section

shows that a consumer can attain a combination in
consumption that yields the highest levels of
satisfaction possible from a given of fixed income
assuming market prices as constant

INCOME AND SUBSTITUTION EFFECTS